At the beginning of the year, Johnny did a few posts on the dirty details of the Roth IRA. Those posts, condensed? We’re big, big fans of Roth. We maxed out our Roth IRA last year, we’ve maxed it out this year (using our tax return from Uncle Sam), and we plan to max it out each and every year. In short, we are on the Roth train.
And here’s why.
First, we love everything about Roths: no taxes on withdrawal, penalty-free withdrawals on principal, and, of course, the compound interest. Thanks to the penalty-free withdrawals on principal, we’ve started using our Roth as an emergency fund, as many of you have said. But most importantly, we really like what a yearly maxed-out Roth means for our retirement.
So let’s talk numbers. Because who doesn’t love a little math? (raising my hand)
In our rough calculations, we need between $1.5 and $3 million saved for retirement, which is a pretty large margin. Rough calculations, remember? We’ll do a post in the near future where we do more specific calculations of exactly what we need for retirement. But we’ll stick with those numbers for now.
So far we’ve contributed $22,000 to our Roth ($5,500 for each of us for two years). And we plan to retire in 37 years. So if we put $11,000 in each year, we’ll have contributed a total of $429,000 over the next 37 years.
So where will that $429,000 be in 37 years, once the money babies have had their way with it?
Well, let’s start with a very conservative scenario where the money only gains an average of 4% interest. Once again, very conservative. That $400,000 will have grown to $1 million bones!
But now let’s talk about another likely scenario. Let’s say the money gains an average of 8% interest. That $400k will have grown to $2.79 million!
Pretty amazing, right? Obviously, it’s choosing smart investments that will make us money, not the Roth itself.
It just sounds so simple: If you save $11,000 a year, you’ll be set for retirement. Obviously, setting aside $11,000 a year might not be attainable for everyone, and it’s a huge stretch for us. But it seems worthy of trying. This also doesn’t take into account our employer-sponsored retirement plans, which we hope we’ll continue to have access to and contribute to as well.
And for all you youngins who are pushing off saving for retirement and rolling your eyes at our obsession with money making money babies, we’ve got an incredible chart for you on the power of compound interest, by the folks at JP Morgan Asset Management.
This chart represents compound interest at an average growth rate of 7%. Do you see where Chris ends up?! So even if you can just put away $5,000 a year, start now!
So, you on the Roth train yet? At the very least, you on the retirement train yet?